Ventas Inc (VTR) — Q4 2021 Earnings Call Transcript

Thank you, David. Good morning, and welcome to the Ventas fourth quarter financial results conference call. Earlier this morning, we issued our fourth quarter earnings release supplemental and investor presentation. These materials are available on the Ventas website at ir.ventasreit.com. As a reminder, remarks made today may include forward-looking statements, including certain expectations related to COVID-19 and other matters. Forward-looking statements are subject to risks and uncertainties, and a variety of factors may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, all of which are available on the Ventas website. Certain non-GAAP financial measures will also be discussed on this call. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to our supplemental posted on the Investor Relations section of our website. And with that, I'll turn the call over to Deborah Cafaro, Chairman and CEO.

Thank you, Sarah, and I want to welcome all of our shareholders and other participants to the Ventas fourth quarter and year-end 2021 earnings call. 2021 was a year that was bracketed by two very positive developments. At the beginning of the year, we rolled out life-saving vaccines in our senior housing communities to keep residents and caregivers safe from COVID-19. And as we close out 2021 and begin a new year, we look forward to posting growth in the first quarter and sustained improvement in our senior housing business through 2022. In between those bookends, our Ventas team found a way to drive our business forward in a highly dynamic environment. While prioritizing health and safety, we took proactive steps to capture upside in the senior housing recovery, delivered strong organic growth in our office and triple-net healthcare businesses, and stayed financially strong. We also extended our long track record of value-creating external growth with $3.7 billion in new investments focused on our strategic priorities of senior housing and life science. As we enter 2022, we are reporting a fourth quarter that exceeded our expectations on the strength of senior housing and office performance. Carrying that momentum forward, we expect total portfolio NOI growth, once again led by our senior housing and office businesses, with additional contributions from investment activity and deeply appreciated grants from HHS for our assisted living communities in the first quarter. We're pleased that we can benefit from both organic and external growth in the first quarter, consistent with our long-standing value proposition for shareholders. Let me put our investment activity in a broader context and discuss some of the highlights. Since 2010, we've averaged over $3 billion per year in average investment activity across asset classes, executed in a variety of transaction types, large and small. 2021 provided excellent examples of our approach and execution. Consistent with our current capital allocation priorities at this point in the cycle, our 2021 investment activity was allocated 70% to senior housing in attractive markets with significant growth potential, 20% to our high-value life sciences business, including the ground-up development of a new research facility anchored by the University of California, Davis, and 10% to expanding our successful medical office building franchise. Within the senior housing capital allocation sleeve, we completed both the new senior investment, acquiring over 100 independent living communities in advantaged submarkets at attractive pricing below replacement costs. And we also closed a Canadian senior living deal with a handful of well-performing assets with additional lease-up upside. The Ventas investment team is using its decades of industry experience, strong and varied relationships, and deal structuring ability to address an extremely robust pipeline as we enter 2022. We continue to identify areas of competitive advantage and pick our spots consistent with our strategic priorities and our analytic assessment of risk-reward. We started the year off well, closing over $300 million of investments in the medical office and senior housing areas, both with good in-place returns and both generated by ongoing relationships. With significant opportunities in our sites, we are also confident in the array of funding sources available to us, as we demonstrated by recycling over $1 billion of capital in 2021, split between $850 million of divestitures of noncore senior housing and MOB assets at attractive valuations and over $350 million of full repayment of well-structured loans that yielded unlevered IRRs exceeding 11%. In addition to capital recycling, these transactions improve the quality of our portfolio and the sustainability of our go-forward cash flows, which also supports our well-covered dividend. We also grew our Ventas Investment Management business during the year and successfully accessed multiple capital markets opportunistically. VIM is a huge success story and now has over $4.5 billion in assets under management with leading global institutional investors. Our perpetual fund alone raised nearly $0.75 billion in untapped commitments this year. These embedded capital relationships provide another powerful tool to fund growth and build a valuable business at the same time. Turning to our values that dovetail with shareholder priorities. I'd like to highlight our enduring commitment, achievement, and recognition in the area of environmental, social, and governance, or ESG. Our ESG leadership continued during 2021 as we substantially elevated our ESG profile. Among other things, Ventas made meaningful investments in energy-saving technologies at our properties. We were named to CDP's A List, the top 2% of global companies for tackling climate change, and also named NAREIT Healthcare's Leader in the Light for the fifth consecutive year. We have also ramped up our actions to improve diversity, equity, and inclusion in our company, our industry, and our country. We've taken definitive steps in recruiting, investment, and community engagement and adopted goals to drive ourselves even harder in the coming years. Finally, our commitment to outstanding governance continues with rigorous and regular board refreshment, adding directors who are independent and diverse and who bring a record of accomplishment and subject matter expertise to our company, such as recently added directors Maurie Smith and Margerie Nader. In closing, I'd like to give a huge shout out to my Ventas colleagues whose talent, resilience, agility, and commitment to doing their best over these past two years has been inspiring and to our operating partners who have navigated the pandemic on the front lines with courage, caring, and commitment. We also deeply value and appreciate our lenders and equity investors who support and encourage us. We are committed to using all the tools at our disposal, including our high-quality, diverse portfolio, experienced team, and platform to excel for their benefit. Justin?

Thank you, Debbie. The senior housing outlook remains bright. Today, I will speak to the favorable trends informing our outlook for growth in the first quarter, provide an update on key portfolio strategy and actions, and recap our strong fourth quarter results. I'm happy to report that we expect occupancy, revenue, and NOI to grow in the first quarter. Demand remains robust with January lead volumes at all-time highs since the onset of the pandemic, and clinical conditions are dramatically improving. Core operational performance continues to deliver strong results as operators weather cost challenges, and the macro supply-demand backdrop should continue to power underlying growth. I'm proud of the team and operator base we've assembled as we've accomplished a lot over the last two years. Our senior housing business is competitively positioned to capture the benefits of the ongoing sector recovery, and I could not be more excited for the path ahead. During recent community visits, my team and I witnessed firsthand the strength of the top of the sales funnel, as tours were abundant. As COVID cases have declined and tours have picked up, the energy at our communities has been evident. We are expecting significant revenue growth of 10% in the first quarter supported by pricing power and robust underlying demand. We executed our pricing strategy to drive outsized rent increases led by Atria and Sunrise. Leads in our year-over-year same-store pool of 321 assets exceeded 16,400 in January, the highest volume achieved since before the pandemic. We expect a strong supply-demand backdrop to further support lead and occupancy growth. Supply levels are expected to trend favorably as construction starts and deliveries have improved significantly versus pre-COVID levels. Additionally, our footprint is well-positioned as we witnessed new starts in just three of our top 20 markets. Needless to say, I am very encouraged by the fundamentals supporting our business and the opportunity for growth moving forward. Bob will cover our first quarter guidance shortly. But for SHOP, it includes 10% revenue growth at the midpoint and 6% to 15% NOI growth at the lower and upper ends, respectively. The main variable affecting the NOI range will be operating costs. In January, the surge in COVID cases among employees pressured the availability of caregivers in what was already a challenging labor market. Our communities have continued to make progress implementing workforce management and efficiency initiatives. Net hiring trends are showing early signs of improvement as recruiting resources have been bolstered, labor monitoring capabilities have been enhanced, and targeted competitive wage increases have been executed. We are hopeful the improving clinical backdrop and the operating initiatives will take hold and support the high end of our guidance range, but the midpoint assumes the costs remain elevated. Moving on to portfolio actions. Having been here for two years now, I couldn't be happier with the ability of Ventas to execute on key priorities related to senior housing. We have been extremely action-oriented, executing on acquisitions, dispositions, transitions, resolutions, and targeted capital investments and strengthening our strategic approach to managing the senior housing platform. The Ventas advantage is that we have deep operational experience in the senior housing sector. We've married this operational expertise with our sophisticated analytical capabilities to execute strategic portfolio actions, enhanced performance management, and drive targeted capital investment. Building on the strength of our experienced best-in-class operating partners, we are fully engaged in our aligned interest to create value in our senior housing business. Our latest initiative involves the deployment of our Ventas Operational Insights in close partnership with our operators. Ventas brings to the table an emphasis on operational insights, geospatial analytics, and capital allocation priorities. I couldn't be more pleased with the excitement amongst the operators and my team as they've engaged in this together. Some examples of outputs include in-depth pricing strategies, workforce recruitment and retention management, targeted value-creating CapEx, and formulation of best practices. This approach takes the best of what Ventas has to offer in a collaborative effort with our operators to drive business results. We've taken several decisive actions as we continue executing on our strategy of the right asset in the right market with the right operator. Since the start of 2021, Ventas has added 6 new senior housing operating partners, bringing our portfolio to a total of 37 relationships. This portfolio balance, along with the deep industry experience of our operators in their respective markets positions us to grow our relationships and strengthen our senior housing platform over time. Recent portfolio actions include the sales of 29 noncore senior housing properties in 2021, resulting in approximately $400 million of gross proceeds. These communities represented orphan assets in markets with elevated competition and in need of significant capital investment. More recently, we completed the acquisition of Mangrove Bay and are thrilled to add this premium, 160-unit senior housing campus through our growing portfolio. What a great opportunity to recycle capital out of noncore assets at a 2.5% yield and into a Class A asset at 5.5% in an attractive market. Turning to fourth quarter performance. Total SHOP NOI achieved the high end of our expectations in the fourth quarter of '21 and same-store average occupancy in the fourth quarter of '21 versus the fourth quarter of '20 grew by 200 basis points to 83.4%. Rate and revenue grew for the first time since the start of the pandemic as same-store revenue increased 3.3% year-over-year. As we anticipated, operating expenses, excluding HHS grants, increased sequentially by $8.7 million or 2.6%, the majority of which was driven by incremental labor expenses. SHOP NOI, excluding HHS grants for the sequential same-store pool declined modestly by just $1 million or 90 basis points, and NOI for the year-over-year same-store pool declined $3.8 million or 3.6%. Both are leading results among peers. For the non-same-store pool, underlying performance was stable. In closing, my enthusiasm for the outlook in our senior housing business remains high as we are well-positioned to succeed in what we expect to be a favorable macro backdrop. With that, I'll hand the call over to Bob.

Thank you, Justin. I'll begin with our first quarter outlook and wrap up with a summary of our balance sheet before we move to the Q&A session. For Q1, we expect net income to be between $0.07 and $0.11 per fully diluted share. Our normalized FFO for Q1 is projected to range from $0.76 to $0.80, with a midpoint of $0.78. This guidance includes $0.08 from HHS grants received in Q1 of 2022. Excluding HHS grants for both periods and adjusting our Q4 for a one-time $0.03 Kindred M&A fee, we anticipate Q4 to be $0.68 and Q1 to be $0.70. This growth can be attributed to $0.02 sequential growth from our senior housing portfolio. In terms of property expectations for Q1 2022, net of HHS grants, we forecast a year-over-year same-store cash NOI increase of 2.5% to 5.5% for the total same-store portfolio. Our SHOP guidance aims for an increase in occupancy by 410 basis points year-over-year, which is expected to drive revenue growth of 10% due to occupancy gains and strong in-place rate increases, with an NOI growth range of 6% to 15% excluding HHS grants. At the guidance midpoint, we expect operating costs to stay elevated during the first quarter, even as COVID-19 conditions improve. We project our triple-net portfolio to be down 1.5% to flat for the first quarter, with growth led by escalators but slightly offset by modest rent reductions in the triple-net senior housing portfolio due to the pandemic's impact on smaller tenants. Over time, we believe the benefits of the senior housing recovery will also benefit these operators and Ventas. We expect our office portfolio, which constitutes one-third of our holdings, to achieve a same-store NOI growth of an attractive 4% to 5% in Q1. Under Pete Bulgarelli's leadership, our operational initiatives in MOBs have yielded positive results, as evidenced by a 3.4% increase in same-store fourth quarter NOI, marking the second consecutive quarter of over 3% growth. New leasing in MOBs was up around 55%, with customer retention reaching 92% for the quarter, and this strength is anticipated to continue into Q1. Notable Q1 guidance assumptions include no additional HHS grants beyond the $33 million received, no new unannounced significant acquisitions or capital market activities, and a total of 403 million fully diluted shares. We’ve provided further insights in our business update deck and supplemental information, including assumptions for Q1 versus Q4 sequential SHOP performance and a reported segment NOI to FFO trending schedule for better visibility into unique items in our results. On balance sheet leverage and liquidity, in 2021, we bolstered our portfolio and strengthened our balance sheet by disposing of $1.2 billion in assets and making loan repayments to cut down near-term debt. Additionally, we extended our duration and raised our fixed-rate debt to 91% by leveraging the bond markets in both the U.S. and Canada, including a 10-year U.S. unsecured offering at 2.5%, the lowest rate for a 10-year health care REIT in 2021. Our net debt to EBITDA remained stable at 7.2 times in the fourth quarter, and with the ongoing recovery in senior housing, we anticipate improvement in that ratio over time. This positive outlook leads us confidently into 2022, buoyed by the robust senior housing recovery and our commitment to our portfolio, partners, and team in creating value for all our stakeholders. This concludes our prepared remarks. I will now turn the call back to the operator.

And first of all, thank you for the increased disclosure. It is very helpful. But I guess my question will be on senior housing. So clinical trends continue to trend favorably and assuming there's no disruption from another variant or anything, how do you think about the ability to decrease the use of agency labor going forward?

It's Justin. So if we step back and you look at the macro backdrop that was causing labor shortages, this was happening in the third quarter. We anticipated that, that would continue into the fourth quarter. What happened during that period is we had net hiring in our portfolio so that we are encouraged about the hiring trends. And then Omicron happened, and that really had a big impact in the first part of the first quarter. You can see some trends in our business update, where we show the clinical cases among our employees. And what's encouraging is you can see that those cases are coming down. But we're not all the way out of the woods yet. So the first thing we're going to look for is to have a healthy workforce, the second thing is to continue those net hiring trends. And then as that continues, then we would expect the agency cost to be able to come down.

I wanted to focus on senior housing. Justin, the leads are certainly positive here. Could you discuss the sales cycle? I know you are predicting a slight decline in occupancy, but considering the apparent pent-up demand and the rapid decrease in cases, is there a chance you could actually transition new residents in later this month and into March, potentially exceeding the projected decline of 20 basis points in occupancy?

Sure. So you've probably noted that leads are really high. In fact, I mentioned that they're the highest volume since the onset of the pandemic. Leads are going to be critical to supporting the senior housing recovery that's underway. Getting to your question, it certainly seems possible that the move-ins that didn't occur in late January could flow over into February, and we would definitely qualify that as pent-up demand. As you know, a lot of the move-in activity happens towards the end of the month. So we're looking forward to see how that plays out.

Welltower held their call this week, and I mentioned that there likely wouldn’t be a company focused on external growth in an elephant hunting manner. I'm interested to know if you share this perspective. Specifically, I'm considering how you recognized senior housing and life sciences as your strategic priorities. Is it possible that medical office buildings, given the current pricing in that sector, could become a major source of funds to be reinvested in a way that might be considered elephant hunting?

Rich, good to hear your voice. Look, I think our competitive advantage has really always been our ability to do all different types of deals across our asset classes and to do so in a way that's created value, and that includes sort of getting into MOBs early and building a great business. It includes, of course, allocating capital to senior housing and most recently, our significant investment in value-added life sciences. I mean, that has just been really, really incredibly positive for our shareholders. So we have sold MOBs as we talked about this quarter, I think recycling that capital has enabled us to upgrade our portfolio in a very positive way. And we'll continue to look for opportunities to do that while at the same time, our investment activities will continue our long pattern of really picking our spots where we have a competitive advantage and think we're going to add value from good risk-adjusted return.

In terms of just going back to the agency labor costs, I wanted to see if you guys had the number for the whole portfolio or at least, I know you break it out for the same store in the presentation, which is very helpful. It's 7.7% of labor, but you have the bigger portfolio now with new senior and others. So I'm just trying to understand like a full agency labor number that was in for the fourth quarter and when you're saying for the first quarter that it's going to be elevated? Or is it just literally like the same amount of agency labor in the first quarter?

Hey, Nick, it's Bob. I direct you to Page 16 of our investor deck. I think there's a nice description of the pie chart of revenue and its decomposition. And you can see within that in-house labor is 42%, contract labor is 4%. You can apply that to the entire portfolio or subsets of the portfolio. It will give you the same relative composition and you'll see the picture down below of what that means for the year-over-year pool. Though contract labor is important, and it has accelerated and indeed in January, accelerated even further, the underlying costs really are driven by the in-house labor. And that is really the key. And hence, that's why we're so focused on bringing that in-house. Should we do that successfully, that's clearly upside given the cost per hour. But ultimately, it's a much smaller piece of the overall cost than in-house labor, but clearly an opportunity there.

Can you discuss the non-same-store portfolio from the quarter? You mentioned that performance was stable. Could you elaborate on that, particularly regarding the NAND transition properties? What is the status of those? Also, what does your guidance for Q1 include in relation to the transition portfolio?

Let me take the numbers first, then I'll let Justin give some of the color. So the outperformance at the high end of our range that we delivered in the fourth was led by senior housing, particularly the non-same-store portfolio. There are two pieces of that in the fourth. There's new senior in the transition 90 assets. Both those pools performed well at the higher end of our expectations, which we're really pleased with. The assumption carrying that into the first is continued stability, notably within the transition. The new senior assets I'd highlight are in the sequential pool in the first. And so as you look at the guidance for the sequential pool, you'll see the impact of new senior, which is growing nicely. And that's the outlook. So Justin, any commentary on the 90 and how it's going?

Yes. I would like to add that we successfully transitioned all of those communities to different operators by the start of the year, and everything is going relatively smoothly.

So just a question or two here on the triple-net portfolio. So Ventas during the corner with a so positive SS NOI in the fourth quarter in triple net. And with the guide for that to be down 1.5% to flat in the first quarter with senior housing and the road to recovery overall, can we assume that the rent resets are hopefully behind us now within the triple net portfolio?

Thanks for your question. I think we have a page on this also in the business update. We have really been action-oriented, as Justin talked about, and have addressed the lion's share of our senior housing portfolio, which is really 50% Brookdale, and you've seen the EBITDA guide they have there. Because of the length of the pandemic, there are a couple of small operators that are still challenged by the length of the pandemic. And really, the outcome there is pretty dependent upon HHS support, but more importantly, the recovery in the senior housing business, which we expect to be robust, and we expect to get the benefit of that over time.

Just hoping to follow up on Stephen's question. The triple net portfolio, what percentage is paying kind of cash 1 times EBITDAR? Can you quantify the potential upside as those leases revert to market to the contract rents?

Yes, sure. As Debbie said, those operators that have had elongated challenges are just a few and each represent less than 1% of our overall portfolio. Those operators will benefit from HHS funds, and they'll benefit from operational improvements and the recovery of senior housing just as our SHOP portfolio does as well. So we're anticipating that the triple net would behave similarly through our SHOP portfolio. We do have some cash flow paying tenants, and that's in a range of around 15% to 20%.

So maybe just stepping back, Debbie and Justin, just thinking about sort of the external growth piece of it, as you outlined the track record and what you've done in 2021. As we look to '22 and '23, can you talk about just how you think about growing in senior housing, in particular, with what you're seeing fundamentally the longer-term growth opportunities and maybe especially talk about on balance sheet versus maybe using more of a JV structure?

Good. I'm going to ask John Cobb to address the senior housing question, and I would expect most of our senior housing to be on balance sheet.

Yes, this is John Cobb. Yes, I mean, I think most of our pipeline, which is fairly robust today really mirrors what we talked about in 2021. We're seeing a lot of senior housing. We're seeing some select life science development opportunities with our partners, Wexford. And we're seeing a few medical office buildings, mainly with our existing partners that we have in our portfolio. But by and large, it's senior housing, we're seeing some really good high-quality portfolios out there that we expect to transact in 2022. So we're very excited and looking at these transactions and hopefully acquiring them.

Otayo?

You hear me?

Yes, we can.

Good quarter, great to see things heading in the right direction. I wanted to move off senior housing, talk a little bit about the office portfolio. And then in 4Q, really strong same-store NOI growth yet again from the MOB, somewhat weaker on the Life Sciences side. I wondered if you could talk a little bit about what happened with both areas to kind of perform the strong performance at somewhat underperformance? And then how do we think about that going forward in 2022?

Well, you made Pete Bulgarelli here. So, Pete, can you address the force in the first?

Yes, I was just figuring out how to activate my microphone. Let's start with MOBs. We had a really strong second half in 2021. As Bob mentioned, we completed a significant amount of new leasing, totaling 3.7 million square feet for all office categories. The new leasing was considerably higher than in 2020 and even exceeded 2019 levels for MOBs. Our retention rate was 86% for the year, 92% for the quarter, and particularly exciting was December's rate of 95%. Although there wasn't a lot of leasing in MOBs, it was of very high quality. For instance, our average lease term for new leases was nine years, which increased the entire portfolio's weighted average lease term from 4.8 years to 5 years. Similarly, our escalators for new leases were 2.9% for the quarter, raising the portfolio's escalators by 30 basis points, which is quite significant. This allowed us to grow for two consecutive quarters, which is a great achievement. Looking ahead to the first quarter of 2022, we expect this positive trend in MOBs to continue, mostly benefiting from higher occupancy rates at the end of the year. I can confirm that in January, we are on track to meet our expectations for MOBs. Transitioning to R&I, reflecting on the fourth quarter, I want to provide some context. We had a very solid year for R&I, achieving 13.9% growth for the full year. Even without the termination fee, we saw growth of almost 4%. The revenue for R&I in the fourth quarter was satisfactory, though expenses were higher than usual due to the transition of buildings from construction to occupancy. Real estate taxes lagged in response to this transition, leading to a substantial tax payment in the fourth quarter. Additionally, with many buildings returning to occupancy during this period, utility costs surged, exacerbated in Baltimore and Philadelphia by significant utility rate increases. Overall, we are pleased with the R&I performance in 2021. Looking ahead to 2022, we expect the occupancy growth to contribute positively in the first quarter, alongside strong expense management. I am very optimistic about the office business for 2022. Apologies for the lengthy response; I got a bit carried away.

I wanted to ask about the resident renewals that are currently in progress. I know that for January 1, it was 8%. I'm curious about how they are trending for the later renewals. Additionally, could you provide an update on the re-leasing spreads and what we should expect moving forward?

Yes. I'm glad you raised that because obviously, as we talk about revenue growth and the in-place January 1 rate increases are extremely important. I think it's important to note that, that applies to a part of our portfolio, and we'll continue to have pricing opportunities as we deal with the anniversary renewals and rate increases as we deal with new residents coming into the portfolio as occupancy is increasing and also the care component, which can increase throughout the year. So those are all opportunities that we have in front of us. And obviously, it was a good start with the 8% increase in January.

And then I would just add that as we're working to identify what the appropriate pricing is moving forward. As I mentioned, Ventas OI, which really stands for operational insights and really taking the best of our data analytics, combining it with our operating experience and the experience and expertise of our operating partners. We collect vast amounts of geospatial data and demographics, wealth penetration rates, new construction to train our demand and supply forecasting models, which have been remarkably accurate as it pertains to decision-making on pricing, acquisitions, and dispositions. So we have that approach at our disposal and the levers that Debbie mentioned around care, street rates, and the anniversary rent increases that will happen throughout the rest of the year.

And the demand that we're seeing from the leads obviously demonstrates the value proposition and the strong consumer demand for these services. And so that is a tailwind as well, that should support these efforts.

I'll add. I don't know if you mentioned this, the re-leasing spreads have been improving. Market prices are firming. It's obviously fundamental. So the combination of the in-place increases and improving re-leasing spread, the care component, which can be priced throughout the year, and the anniversary pricing. In a dynamic inflationary environment, there's a number of different levers at our disposal.

Thanks, Josh.

You have Adam on for Rich. I hope you guys are all well. I just wanted to kind of ask about the kind of the expense control and the agency labor. I recognize that the kind of the pressures there. I kind of wanted to see if you could maybe quantify the kind of December versus January versus February to date impacts. How have trends gone, the agency labor usage increased over these three months, decreased? If you could just kind of quantify the sequential move that I think would be kind of helpful to think about how the quarter is playing out and what kind of the outlook would be for the next couple of quarters?

Sure. Again, I'll direct you to Page 16 of the business deck. I think it's nice to be able to see how labor breaks down. And for this pool, there's $16 million of contract labor in the fourth quarter. I'll call it, just $5 million on a run rate basis. We saw that accelerate to call it $6 million in December and into January. And that's what we've effectively carried forward in our assumptions. Each pool is different, but that kind of gives you a flavor of it. Clearly, if the clinical situation improves, the staffing continues to get traction, that would be an opportunity. But that's how we dimensional that cost.

You guys did a good job detailing your recent capital recycling transactions. I guess where does Ventas stand in that overall process? I mean how much of the current portfolio specifically in the seniors housing kind of falls in that noncore bucket that the company would likely to eventually sell out of?

It's Justin. I'm happy to report, as I mentioned, all the actions we've taken that the heavy lifting is really behind us. There'll always be some noncore assets that we're looking to sell, transition, or invest in, or do something to create value, but it will be a small number moving forward.

For the $205 million of 4Q SHOP labor, where do you think that number goes to you're fully staffed at market prices but without the heavy contract labor component?

The real question I think that you have to answer for that is what's happening to the $189 million of in-house labor. Again, I think the focus is very much and rightly so on contract labor, but the key in terms of total cost is in-house labor. And that gets to the macro question of where the labor market and therefore, inflation go, which I'm not going to pretend I know the answer to. I think the economists will tell you many of them that that macro situation will improve in the back half. We subscribe to that but very tough to call. And so we're not going to make a long-term focus.

And in the near term, we're projecting essentially a run rate in the quarter.

Justin, a quick question for you, and apologies if you've chatted about this in recent quarters, but I am hoping you can help quantify the operating upside of recent initiatives you rolled out and you are currently rolling out new to the company? So just trying to understand how much higher the earnings and the NOI power of the SHOP portfolio will be under your purview versus the betas bold?

Yes. There have been many actions taken over the past couple of years. Some priorities were accelerated because of the pandemic. The goal of these actions, whether we are acquiring, disposing, investing in capital expenditure, or transitioning assets to new management, is to create value and enhance our ability to drive net operating income over time. Ultimately, time will tell. We have made a solid start and are satisfied that we met our expectations in the fourth quarter. We are excited about the growth we are seeing in the first quarter.

Nobody get excited. I'm going to ask a question about MOBs. Recently, not just you but also your peers have mentioned improvements in re-leasing spreads, better annual rent increases, and MOBs. Given the current inflationary environment, how do you view the potential for rent increases moving forward? Is it possible to exceed 3% on rent bumps? Can we anticipate higher re-leasing spreads? What has been the willingness of tenants and MOBs to accept these changes in the past? It hasn't been common, but it appears to be shifting recently.

I mean one thing that's really important to remember in the MOB business is that the assets are priced and have a low cap rate because of the reliability of the cash flows, as we've seen over the past two years the benefit of that and the reliable growth. They also have higher margin, a much lower labor component. And so you have to look at both sides of the equation, I think, when you're thinking about the risk/reward of an asset class. And so Pete can answer; we ask him every 15 minutes if they can get higher escalators. And so we'll let him answer that.

Daniel, that's a great question. This is Pete. Our portfolio is mostly on-campus, so there aren't many options available to compete with us. Competing typically requires new construction. Given the current inflation and market conditions, the costs associated with building a new medical office building and the necessary leasing rates have increased. Our leasing team is very focused on what's happening with demand for medical office space and construction costs in specific locations. In many cases, we find ourselves competing against brand-new medical office buildings, which allows us to increase our escalators and our initial rental rates.

Yes. And remember, you're pushing through the expense increases to the tenants as well. So you really have to look at the revenue and the expense side to really evaluate the benefits of the MOB.

Yes. We only have a couple of percent of our leases that are gross leases. The rest are some fashion of pass-throughs of expenses.

Just a quick modeling question. For 2020, realizing you're not giving full year guidance for earnings. But just wanted to get a sense of what you guys are expecting from a FAD CapEx and G&A perspective for those two line items?

Sure. So I'll start with G&A. We did give a $37 million number for the first quarter. With stock comp amortization, which is our FFO treatment on that. So $37 million. And if you look at just 2021 G&A Obviously, that was a very good year in terms of year-over-year in cost management. We hope this year, we get back to normal business as usual to some degree, which will obviously have an impact in terms of just T&E and things like that going up. But first quarter, very much in line with risk quarter year-over-year, frankly. In terms of FAD CapEx, really, there are a few things I'd highlight. Obviously, with the acquisitions we've done, particularly in the new senior in a higher SHOP portfolio base. There's more FAD CapEx dollars. And secondly, and Justin should touch on this, more opportunities for us, I think, to really focus using our OI as now branded to identify opportunities to invest in the portfolio. And so we'll see some acceleration there.

Yes. And I'd just say consistent with some of my other comments, the goal is to create value. CapEx is a tool at disposal and with the use of our analytics and operational expertise and combined with the operating partners' local market experience, we can make smart choices and anticipate returns on that investment.

I have a quick question for you, Justin, followed by another for Bob. Justin, regarding the shape of the recovery this year, I'm interested to know if you've analyzed the potential for portfolio uplift throughout the year. Do you think this year could resemble last year in terms of occupancy gains, considering the strengths and leads you're observing early on? I understand it's challenging to predict, but given the slight increase in occupancy already, what are your thoughts on the potential uplift in occupancy within the SHOP portfolio throughout the year? And Bob, regarding the asset sales, there's a loan maturing this year, approximately $500 million. I'm curious about the timing or expectations—will it be repaid or extended?

Yes, I will take the loan, and it can be extended. That's our expectation at this time. Regarding occupancy, we anticipate a significant year-over-year increase in the first quarter, which has been better than expected while still following seasonal trends. It's important to keep this in mind when evaluating the year's trajectory.

Yes. Just one for Justin, maybe Bob. You did talk about the releasing spreads improving, but still being negative. And I guess the question I have is, with that to being negative, I guess I'm still somewhat surprised that you can push renewals as high, especially kind of given again, industry-wide occupancy is still kind of well delivered below where renewal rates are. So trying to understand those dynamics of why it is that you don't get that much pushback when there's still a high vacancy industry-wise and market rates just below where renewal rates are.

That's a great observation. And I think it really does go to a value proposition that being offered by the communities for the theaters and their families that at this level of occupancy, we have been able to successfully drive pricing in the first at the beginning of the year, and that portends well kind of for the future as occupancy increases. So, Justin, do you want to talk about the normal re-leasing spreads and how...

Sure. The re-leasing spread has tightened since the end of 2021, returning to levels we saw before the pandemic, which were negative mid-single digits. The challenge is that we experienced significant rent increases in January, so when we compare to these higher rates, the releasing spread appears to widen. However, this doesn't mean that our pricing power isn't improving. One thing we are optimistic about is that, given the current demand, we might eventually reach positive re-leasing spreads again, a trend we've witnessed during various times in the sector's history. There seems to be support for this happening moving forward.

Just maybe one broader question as we look into the second half '22 and '23. With new senior and just your other acquisitions, you now have more of a tilt towards IL versus AL in the RIDEA pool, eventually, same-store pool. What does that mean from an expense growth standpoint and then a pricing power standpoint for the second half in '23?

Independent living is a high-margin business with lower labor costs compared to assisted living. It's not as dependent on immediate needs, so while we may not see a significant increase in occupancy right away, we believe there is potential for higher occupancy rates in independent living over time due to fewer challenges in that area. This aligns with the historical performance of independent living. We anticipate revenue growth in our independent living communities. Assisted living, on the other hand, is driven by necessity and tends to perform well regardless of the economic environment, provided there is funding available for the services, which there is thanks to current housing values and demographic wealth. We expect this trend to persist. Our opportunity lies in gradually adjusting labor costs, and we've had a positive start with our notable increases in-house.

One other thing we appreciate about independent living is that it coincides with a period where over 8% are experiencing growth over 3%. We are approaching a demographic boom, and the independent living tenants tend to be slightly younger. This aspect of the business, along with lower labor costs, is something we find favorable. Great. Okay, we have one more question. Okay.

It's Michael Bilerman here with Nick. I was wanting to go just in terms of acquisitions in terms of the fund, as your cost of capital has improved, both from a debt and equity perspective, how do you sort of look at that opportunity to buy within the fund relative to on balance sheet? And how are you balancing that as you're looking at the transaction market for opportunities?

Thank you. The fund is an excellent tool for us as our VIM business continues to perform well, allowing us to drive growth. It was carefully planned to be a valuable part of our growth strategy, focusing on prudent capital costs and allocation. Essentially, it helps us capitalize on opportunities that were less attractive on our balance sheet due to our cost of capital compared to the pricing of certain assets. For instance, we successfully included our South San Francisco and John Hopkins life science buildings in the fund. These acquisitions would have been challenging without the fund structure, but now we hold a 20% interest in them, earn asset management fees, and potentially benefit from other economic incentives based on performance, which has been positive. This approach reflects a well-defined strategy aimed at enhancing our business for the advantage of both our public shareholders and third-party institutional investors.

Well, it's been a great call, and I'm very glad to end the year on a very good quarter and look forward to another positive one in the first. I really want to thank everyone for joining our call today. I can't tell you how much we appreciate your ongoing support and interest in the company, and we look forward to seeing you in person soon. Thank you.